Our Shariah Board Members

Our Expertise In Shariah Stock Screening

Ratings Intelligence has been the thought leader in highlighting emerging issues in Shariah equity screening and has given the industry new standards for Shariah equity screening in areas such as:

Treatment of Islamic Debt

Treatment of Islamic Cash & deposits

Treatment of fully Islamic companies

Defining screening criteria for Islamic financial institutions.

Our Shariah Equity Screening Solution enables fund managers an access to a pre-screened universe of stocks which are Shariah compliant.

Our system and technology can also be customized to classify equities as Shariah-compliant based on a customized Shariah criteria specified by the asset manger’s Shariah committee.

During the screening process, each company’s audited annual/quarterly reports are reviewed in depth by our team of well qualified Islamic researchers to ensure that the companies screened are not involved in non-Shariah compliant activities (within permissible thresholds) as prescribed by the Shariah Committee.

Those that are found to be in breach of the Shariah criteria are screened out.

Each company is analyzed individually by getting further confirmation from the respective company management by directly getting in touch with them wherever information is ambiguous.

Companies deriving revenue from all forms of Alcohol are considered non-permissible. This involves producers, bottlers, suppliers, retailers and all other support functions serving and deriving revenue from the alcohol industry.

Look out for:

i.Specialised crop producers which grow and sell crops exclusively for alcohol production

Example: A bran farmer growing a specific variety of bran and sells its produce to an alcohol manufacturer.

ii.Breweries

iii.Wineries

iv.Capital goods manufacturers making brewing machines

Example: A custom-built machine manufacturer or automation engineering company manufacturing a brewing or distilling machine. Revenue from such machinery sales will be considered not-compliant

v.Bottle manufacturing companies making specially designed bottled using for packing alcoholic beverages

Example: A specialty glass bottle manufacturer making custom designed wine bottles as well as other bottles. The revenue from manufacturing such customised wine bottles will be considered non-permissible.

vi.Packing material manufacturers producing alcohol packaging

Example: A bottle label printer, undertaking to design and print labels for alcoholic beverages in addition to it printing labels for other non-alcoholic beverage producers. Revenue from sales to alcohol industry will be considered not-compliant.

xii.Real estate companies leasing to restaurants, bars, supermarkets.
These companies can be tricky. What one needs to ascertain is the amount of area being utilized for alcohol sales and not the proportionate revenue share from alcohol sales.

Example: A real estate company owning a mall has leased space to a supermarket. This supermarket also sells alcohol. Let’s say the real estate company derives rental income of $100 from the supermarket. Based on markets, if we know/assume that about 10% revenue of the supermarket is from alcohol sales we may proportionate that 10% of the rental income of the real estate owner is from a non-permissible source i.e. Alcohol sales. The non-permissible revenue of the real estate owner, in this case, will be
$100 x 10% = $10.

But the Shariah committee says non-permissible revenue for the real estate owner should be as per the area used for non-permissible activities by its tenant and not the financial value of the same. Hence, if we assume about 5% of floor area in a supermarket is used to store/display alcoholic beverages the non-permissible revenue for the real estate owner would be
$100 x 5% = $5.

xiii.Sugar manufacturers producing alcohol as a by-product. As a residual product of sugar manufacturing, molasses are produced. This could be sold to the alcohol industry and used in the distillation process. Revenue from such sales would be considered non-permissible.

Companies engaged in conventional interest-based financial services are considered non-permissible for investment by Shariah-compliant investors.

Following financial services businesses are considered non-compliant:

Commercial banks

Investment banks

Mortgage Lenders

Mortgage agencies

Capital markets including stock exchanges

Speciality finance houses

Financial brokerage agencies

Investment management firms/agencies

Stockbrokers

Pawn shops/agencies

Mutual funds and all other financial funds

Underwriters

Insurance companies

Insurance agencies

Insurance brokers

Exceptions:

a.Islamic Banks

b.Islamic Financial Institutions

c.Islamic Insurance Companies

The above businesses are those which have:

i.A Shariah Committee or Shariah scholar who supervises all business activities and products of the company and certifies the same as Shariah-compliant

ii.All products of the company are certified as Islamic either by an internal scholar or board of scholars or by an external Shariah Advisory firm

iii.All investments and non-operating business activities of the company are Islamic

iv.The company must pass all accounting based screens

Look out for:

i.Companies which have compliant products but derive non-operating income [other than interest income] from non-permissible investment activities.

Example: Islamic insurance companies which sell only Takaful products may invest their shareholder's funds in conventional financial instruments deriving non-permissible incomes. Such insurance companies are not considered Shariah compliant.

ii.An Islamic financial institution which derives all its revenues from Islamic products, maintains all its investments in a Shariah-compliant manner but does not have a Shariah supervisory board or a Shariah scholar supervising its activities; such a company will be considered non-compliant. The requirement of Shariah scholar’s supervision is obligatory.

Screening for Transitional Financial Services Companies from Conventional to Shariah

We offer services for screening for those companies that are willing to convert their conventional business to Shariah based on the below criteria and guidelines.

We will also provide such services based on the customised guidelines suggested by the clients and theirs Shariah Supervisory Board.

Businesses producing, printing, distributing or marketing pornographic material are considered non-permissible for investment.

This could be over any media i.e. print, visual or audio. Content which is abusive/offensive is also considered non-permissible.

Look out for:

i.Online marketing firms

ii.Bookstores

iii.Media Firms

iv.Production houses

v.Sexual content in magazines

vi.Gaming companies

Gaming companies producing such gaming formats wherein the characters may use abusive language or may have sexual themes. Such games are usually classified as suitable for adults. Revenue from such games is considered non-permissible.

vii.Cable TV operators

Producers, processors, packagers, retailers of tobacco products

Businesses involved in growing, processing, packing, marketing and retailing of tobacco products are considered non-permissible.

Companies involved in doing research on behalf of tobacco companies or funded by them are considered non-permissible too.

Look out for:

Advertisers of pork, alcohol, gambling, tobacco and all other non-Islamic activities

Advertising broadcasters who display such content which contravene the tenants of Islam

Producers, distributors, and broadcasters of music, movies, television shows, and musical radio shows

Cinema operators

Companies deriving revenue from advertising and media businesses are considered Shariah non-permissible. Advertising is considered Shariah repugnant as they may contain such visuals/language which may be considered inappropriate from a Shariah perspective. Companies producing, airing, distributing or marketing entertainment content such as feature films, music, television soaps etc. are also considered non-permissible.

Exceptions:

News Channels

Newspapers

Sports Channels

Children’s Channels

Educational Channels

a.News Channels Advertising revenues of News Channels are considered compliant as it is assumed that advertising content on such channels would be less inappropriate from a Shariah perspective. Further, such channels seem to serve a greater social good.

b.Newspapers Advertising content in Newspapers is generally textual rather than pictorial. Textual advertising revenues are permissible from a Shariah standpoint as they may not be repugnant to Shariah. Further, such media seem to serve a greater social good.

c.Sports Channels Advertising revenues of Sports Channels are considered compliant as it is assumed that advertising content on such channels would be less inappropriate from a Shariah perspective.

Look out for:

i.Text-based advertising revenues are permissible such as Google ads.

ii.Advertising content producers are considered non-compliant

iii.Media companies carrying these adverts and generating revenues from the same are considered non-compliant

iv.Media companies which produce film content, television soap content are considered non-compliant

v.Animated films and media content producers/distributors are considered compliant.

vi.Revenue proportion derived from supermarkets and bookstores selling music and film CDs or DVDs is considered non-compliant.

d.Children’s Channels

e.Educational Channels

From the viewpoint of Shariah, gold and silver are a medium of exchange and as such cannot be sold forward. Although the primary business activity of gold/silver mining companies does comply with Shariah principles; these companies are not permitted to sell their gold/ silver stocks forward for hedging purposes.

Look out for:

i.Exploration stage companies which have no revenues but have hedged their future production of gold/silver are not compliant

ii.Companies having a derivative loss, but having hedged more than 1/3rd of their gold/silver production are not compliant

Non-Permissible Revenue Tolerance Threshold

In certain cases, revenues from non-compliant activities are tolerated, if they comply with the following threshold:

(Non-permissible income other than interest income) / Revenue < 5%

If a company derives less than 5% of its total business incomes (excluding interest income) from non-permissible business sectors, it may be tolerated and the company will still be deemed to have passed the Level One Core Business Sector-Based Screens.

During the screening process, each company's latest financial statement should be reviewed to ensure that the company is not involved in any non-Shariah compliant activities, regardless of whether the latest statement is a quarterly, semi-annual or annual statement.

If the latest statement is available in all three of these frequencies an annual statement will likely be used, as these are more likely to be audited. Those that are found to be non-compliant are screened out.

Screening Service for Individual listed companies

Screening for companies which are transitioning from conventional to being Shariah compliant:

We offer services for screening for such individual companies that intend to convert their conventional business to being Shariah complaint and help them in building a Shariah road map under the guidance of our in-house Shariah Advisory Board.

Such companies may be in business segments such as Insurance, financial services or other industrial of services verticals.

After removing companies with non-compliant business activities, the resultant companies are further examined for compliance with accounting ratios, as certain ratios may violate the compliance measurements.

Three areas of focus are leverage, cash, and the share of revenues derived from non-compliant activities. All of these are subject to evaluation on an ongoing basis.

Loans from sovereign bodies which are non-interest based (as given by SIDF)

Average market capitalization of stocks

The average market capitalization of X over n months is calculated by multiplying the moving average daily closing price of X over n months (must be adjusted for corporate actions) (Pavg) with the total number of shares outstanding for X.

For stocks that have multiple share classes, this is estimated as Pavg/Plast * M, where M is the current market capitalization and Plast is the last closing price of X (for Pavg and Plast, the figures for the main share class are used).

For companies that do not have a sufficiently long price history (e.g., recent IPOs), the figure Pavg is calculated as the moving average daily closing price of X over n days where n is the number of days X has been trading or the number of days that a daily closing price for X has been available.

Dividend Purification:

Companies having less than 5% of their revenues coming from the prohibited business activities are said to have passed the Sector-based Screens. But the proportion of dividends attributed to revenue generated from such non-permissible business activities and interest income will have to be purified.

Dividend / prohibited income purification is the process of purging the income received from activities/ sources that are non-compliant as per Shariah principles from the total income.

When Shariah compliant securities receive dividend or any other prohibited income as per Shariah principle as part of a company’s normal business operation, a purification process takes place.

Any proportion of income received from activities that are non-compliant as per Shariah principles may be paid to Charity and thereby ‘purified’.

How is dividend purification ratio calculated? What goes into the component of dividends to be purified?

Non-Permissible Income coming from trading of Gold & Silver on Deferred Cash basis, if any

Any other Non-Permissible Income Identified, if any

The sum of the above items is divided by the total revenue

Non-permissible revenue, in this context, includes all forms of revenue or income that is considered non-permissible from a Shariah perspective (e.g. alcohol sales, gambling revenues, etc.…) and includes any income generated from interest and investments.

This ratio (i.e. DP_ratio) determines how much of the dividends received need to be purified or cleansed (i.e. given to charity). As an example, a DP_ratio of 0.10 (i.e. 10%) implies that 10% of the dividends need to be given to charity; while a DP_ratio of 1.0 (i.e. 100%) requires the totality of the dividends received to be purified.

Note:Numbers for DP Calculations are taken from the latest available Annual Reports. In the absence of Annual Report, detailed quarter reports / prospectus are also considered.

i.Consolidated statements

Generally, consolidated financial statements are used in certain regions (e.g., Japan and India), companies often publish separate consolidated and unconsolidated balance sheets and income statements. However, it has been observed that these companies usually are large conglomerates having a large number of subsidiaries, often with a less than 100% holding in each subsidiary. In such cases, using a consolidated company statement often results in the Shariah ratios being distorted (e.g., debt/equity ratios of 200% or above). Because of this, S&P Dow Jones Indices have sought and obtained Shariah Committee authorization to use unconsolidated balance sheets by default and calculate pro-rata figures by taking into account the parent company’s holding in each subsidiary.

ii.Use of audited results or unaudited results

In determining Shariah compliance for inclusion in the S&P Shariah Indices, we use the latest financial statement regardless of whether the latest statement is a quarterly, semi-annual, or annual statement. Annual statements are typically audited while quarterly and semi-annual statements are often left unaudited.

iii.Interim or quarterly results

We use the latest statement regardless of whether the latest statement is a quarterly, semi-annual, or annual one. If the latest statement is available in all of these three formats, the annual statement will be preferred, since it is more likely to be audited and often more complete.

iv.Companies that are fully Shariah-compliant not subject to accounting-based screens

Companies that are fully Shariah-compliant are not subject to accounting-based screens, subject to Shariah Board approval. Such companies are classified as Shariah-compliant irrespective of their leverage ratios. While the subsequent list is non-exhaustive and companies are reviewed on a case-by-case basis, companies are typically characterized by the following

Presence of a Shariah Supervisory Board

All transactions (business and financial) are in accordance with Shariah principles.

Company websites Company accounts Investor relations Company filings Third-party information

Stocks reviewed daily are published to a web service which enables ease of Compliance information retrieval by fund managers.

The information from this web service is downloadable into an excel format as well.

Product Approval Process

Client

FeedBack

Product Specification Document Preparation

RI London

FeedBack

Product Specification

RI Kuwait

Initial product design followed by document preparation

RI Shariah Committee

In the Media

Some of Our Clients

We are currently working with clients who are of a great repute in the world. We work in conjunction with Standard & Poor's as well as Dow Jones to build a robust set of global Shariah approved indices.